Thursday, March 28, 2013

It has been reported in the media that the BRICS group of nations (Brazil, Russia, India, China and South Africa) has decided to establish "a New Development Bank for mobilising resources for infrastructure and sustainable development projects in BRICS and other emerging economies and developing countries, to supplement the existing efforts of multilateral and regional financial institutions for global growth and development"

This would, to my mind, be the first instance of an investor catchphrase becoming a multilateral finance institution. Jim O'Neill, currently the retiring chairman of Goldman Sachs Asset Management, is widely credited with coining the term BRIC to describe the then-emerging economies of Brazil, Russia, India & China, which were to go on to become global economic powerhouses.

The term has since been used and abused by many (One can almost imagine a Miss BRICS beauty pageant sometime in the near future)

However, it has managed to evolve beyond a mere acronym into a formal bloc, united not by geographical considerations or by ideologies or commonality of natural resources, but by the premise of future economic power.

In this context, the statement by the BRICS leaders on the proposed Development Bank seems to have its heart in the right place but the intentions are unclear and the details are missing.

As to intentions, one might argue, for example, that the BRICS Bank can be a tool for increasing the geopolitical sphere of influence of the BRICS countries as a counterbalance to that of the Western economies (and even relatively smaller but important blocs such as OPEC). But in that case, what is the incentive for the BRICS countries to lend to developing countries through the BRICS mechanism when they can do so directly? This has been happening in any case, with China in the lead. Much of Africa, Latin America and Europe now depends on China for its funding needs. In exchange, China gets the natural resources, trade and projects it needs to sustain its gargantuan economy.

Secondly, why should the BRICS lend to other countries, when there are huge financing gaps in their own countries? The problems in financial intermediation and access in almost all the BRICS countries are well-known and well-documented. India would stand to benefit far more, for example, with reforms in infrastructure financing than it would with a BRICS bank.

Thus, given the constraints, one should not read too much into the proposed BRICS Bank. While it may rise a notch above mere rhetoric and become a functioning institution, the commitment & incentives of the member countries to its sustenance will remain sketchy and suspect, leaving it at risk of becoming another has-been in the multilateral financial institution space.